Financial Aid Basics: Know Your Stuff

It can seem complex, but as long as you or your loved ones understand the basics of Financial Aid you’ll be able to ask the right questions; and asking the right questions is paramount to staying away from mega amounts of debt. So, these are some basic terms used in the financial aid process, and my attempt to simplify them. I’ll include in the definitions other sub-terms that are important to know, with links to helpful websites that you can use.

I’ve mentioned in previous posts that you do not want to take out  loans, if at all possible; but if you do apply for federal assistance, then please understand these terms before calling your school’s Financial Aid Office. Call them with a lot of questions ready, because it is easy to make costly mistakes during the application process. Hopefully this information will help you develop the right questions for your situation. Okay, here we go:

Financial Aid Award:  Each college will send you a financial aid award package after you complete and submit the FASFA. One college’s award may be different than another college’s award, since tuition and fees differ between schools. The award will tell you how much money you are awarded in the form of loans, grants, and/or scholarships for that particular school; and it will tell you who will be disbursing the loans and what type of loans you’ll receive. You do not have to accept the award amount – you can request to accept the entire amount, dismiss it, or lower the amount you’re awarded. Why not accept all of it? After all, aren’t more loans better for you? Nope! Remember, loans are not free. The more loan money you use, the more you will have to pay back with interest. Accept only what you absolutely need for college expenses, and no more.

FASFA (Free Application for Federal Student Aid):  The application’s title may indicate it is a “free” process for applying, but any subsidized or unsubsidized loans received are not free. By completing this application you are helping the government determine how much student loan money you’re eligible to receive for college expenses. Be honest with answering all the questions, and call the school’s Financial Aid Office if you have any questions about the application.

Title IV Funds: Title four of the Higher Education Act authorizes certain federal loans to be disbursed for eligible students (eligibility is determined by the FASFA). The loans authorized by this title include direct subsidized and unsubsidized loans, direct PLUS loan (for dependent students and their parents), Pell Grant, supplemental grants (such as the Supplemental Educational Opportunity grant), and the Perkins Loan.

Eligibility: The factors determining whether or not you are allowed federal aid for college expenses (i.e. are you a U.S. citizen, have you been accepted to a university, do you have financial need, are you a full-time student, etc.?).

Award Period: Your loans (as determined by the award letter) are essentially disbursed based on how your school defines an academic year (not a calendar year). Some schools operate on quarters and sessions, and other schools operate on semesters with longer break periods. The award letter itself should tell you when the school’s academic year starts and ends, and when the funds will be disbursed to you during the calendar year. If you make changes to your academic schedule, your award period might change. Call the Financial Aid Office at the school and simply ask when will the loans be disbursed and when will they stop during the calendar year.

Disbursement: The amount of loan money that the college pays the student’s account, or pays the student directly. I recommended that you have your disbursement sent directly to your account at the school, and not directly to you. The reason being – it is easy to spend student loan money on non-school related things, such as a new car, rent, or entertainment. Student loan money is for legitimate “student” expenses (tuition, book costs, fees, dorm housing, etc).

Subsidized (Stafford Loan): If you take out a federal loan, make sure that it is subsidized. With a subsidized loan, the Department of Education pays any interest accrued while you are taking classes, during a grace period, or during a deferment period. In other words, you do not have to pay any interest on the loan while you are taking classes. Once you graduate and the grace period (which is typically 6 months after graduation) passes, you’ll then have to start paying your loans back with interest – but as mentioned, that interest only starts accruing after graduation, not during your time at school. In the long run, you do not pay as much for a subsidized loan as compared to an unsubsidized loan. Go subsidized if you are taking out federal loans.

Unsubsidized (Stafford Loan): A federal unsubsidized loan is a loan that accrues interest from the time you start classes until you make the last student loan payment. This is not ideal. If at all possible, do not sign for an unsubsidized loan, because you will be responsible for the accrued interest from day one of taking classes. You will pay much more money for an unsubsidized loan in comparison to a subsidized loan.

Dependent Student: A young student supported by his/her parent(s) to some degree – usually the parent is paying 50% or more of college costs. Most students under the age of 24 are designated dependent by the FASFA. Exceptions always apply – but the FASFA will figure that out.

Independent Student: A student not supported by parent(s). The student is paying most, if not all, of the college costs, not living at home during school or breaks, supporting herself, and claiming “independent” on her tax return. Exceptions always apply; but the FASFA will figure that out.

Authorization to Retain Funds (ARF): You may be asked by the college to sign a document titled “Authorization for Title IV Financial Aid Funds” . On this form you can choose to send your loan money directly to the school, and have the school apply it to your college expenses. You can also decline that the school retain your funds and have the money sent directly to you. It is recommended that you have the school retain the funds and not have the money sent directly to you.

Student Payment Agreement (SPA): If a student is not eligible to be fully funded by Title IV funds, he may be asked to sign a payment agreement. The agreement will ask that the student pay so much money out-of-pocket each period (as determined by the school). If the student is not able to make the payments, he may not be allowed access to classes and may be forced to withdraw from the university.

Return of Funds by Student: Any funding that the student asked to be sent directly to her in the form of additional funding (stipends) will need to be returned; especially if the student authorized the school to send the loan money directly to her. The student may also be required to immediately return funds if she withdraws from classes after having received the full amount of Title IV funding for the academic year.

Return of Funds by School: Any Title IV funding that was released to the school needs to be returned to the federal government if a student withdraws from classes before the end of his award period. Or perhaps the student is no longer full-time because of a schedule adjustment; so he owes less tuition for the academic year, causing over disbursed funds to be returned. Remember, any changes to your academic schedule (including withdrawing) can impact your financial aid award.

Median Loan Debt:  The amount of loan money many graduates from your school owe back to their lender(s) after graduation. If the median loan debt is high, you’ll want to question why so many graduates owe so much back after program completion. A high median loan debt can be a sign that the program is too expensive, or indicate that the program did not help graduates obtain a high enough salary to pay back their loans quickly.

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